Fitch upgrades Ukraine rating to 'B-' with stable outlook

The issue ratings on Ukraine's long-term senior unsecured foreign- and local-currency bonds were also upgraded to 'B-' from 'CCC', and the sovereign's short-term senior unsecured foreign- and local-currency bonds are upgraded to 'B' from 'C'.

The country ceiling has been upgraded to 'B-' from 'CCC' and the short-term foreign- and local-currency IDRs to 'B' from 'C'.

According to the rating agency's statement published on November 11, Ukraine's external financing pressures have eased. International reserves have increased by $2bn over the first 10 months of 2016 to $15.5bn (around 3.5 months of current external payments), due to bilateral and multilateral support, improvement in some export prices, greater domestic confidence and increased exchange rate flexibility. However, the liquidity ratio remains weak and well below the 'B' median.

In September, the International Monetary Fund (IMF) approved a further $1bn tranche after almost a year of delays in transfers of funds, and a third $1bn US-guaranteed Eurobond issue was placed. "Further disbursements from the IMF and other international partners depend on progress in structural reform, which is subject to execution risks, and developments in bilateral relations," the statement reads.

"External debt repayments to multilateral and bilateral creditors are manageable, and external market debt amortisations resume only in 2019," Fitch added. "Domestic debt roll-over risk is limited, as 91% of the debt stock is held by the central bank and state-owned banks. Some $1.5bn in cash in Ukraine's treasury provides the sovereign with space to bridge gaps in external disbursements in the short-term."

Ukraine's current account deficit is expected to widen moderately to 2.5% of GDP in 2016 from 0.2% in 2015 and approach 3% over the forecast period to 2018. Fitch believes that multilateral and bilateral financing, as well as improving domestic confidence supporting higher net capital inflows, will generate increases in international reserves forecast to average $2.3bn over 2017-2018.

"The macroeconomic policy framework has been strengthened through increased exchange rate flexibility and tight monetary policy. Macroeconomic stability has improved, despite the delay in completing the [IMF's] second EFF [Extended Funding Facility] review, as reflected by rapidly declining inflation, slower currency depreciation and a mild growth recovery," the statement reads.

Fitch forecasts inflation to average 14.9% in 2016, down from 48.5% in 2015, but well above the 4.6% 'B' median.

Inflation in Ukraine accelerated to 2.8% month-on-month (12.4% on the year) in October following 1.8% m/m the previous month (7.9% y/y). The National Bank of Ukraine (NBU) is pursuing puruses an inflation target of 12% +/-3% for 2016 and 8% +/-2% for 2017.

Fitch forecasts debt to increase to 74% of GDP (89% including guarantees) in 2016, from 67% in 2015. After a sharp narrowing in the general government deficit in 2015, the challenge for authorities is to anchor fiscal gains, taking advantage of external bond debt rescheduling.

The rating agency expects the general government to meet its 3.7% of GDP deficit target (3.9% including state-owned natural gas monopoly Naftogaz) for 2016. The 2017 budget targets a 3% deficit, reflecting improvement in tax revenues.

"Failure to keep current expenditure pressures in check and to address the public pension deficit, combined with a proposed increase in minimum wage, are risks for the government's plans to gradually shrink the deficit to 2.3% by 2019. Fitch forecasts a general government deficit of 3.7% of GDP in 2017," the statemen reads.

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